What Is a Fairness Opinion?
A fairness opinion is a file that evaluates the data of a merger, acquisition, carve-out, spin-off, buyback, or every other type of business gain. It provides an opinion about whether or not or now not or now not the proposed stock worth is fair to the selling or objective company.
Key Takeaways
- A fairness opinion is a file regarding the fairness of a giant financial movement like a merger or takeover that an investment banker or an analyst would in all probability provide for a rate.
- Sometimes fairness evaluations are required throughout the product sales of public companies.
- Fairness evaluations are most without end requested as part of a merger or acquisition.
- Fairness evaluations don’t seem to be all the time required in transactions involving public companies, alternatively they may be able to be helpful in reducing litigation likelihood.
Figuring out Fairness Reviews
A fairness opinion provides steering via enjoy to the occasions serious about a merger, takeover, or acquisition. This will likely include the shareholders of the company being purchased or the acquiring company or their respective advisors throughout the transaction. It is essentially a certified opinion supported via amassed knowledge or market enjoy via experience.
Fairness evaluations are written via qualified analysts or advisors, generally from an investment monetary establishment, and are provided to these key decision-makers for a rate. The analysts learn in regards to the specifics of the deal, along with any imaginable business synergies that benefit the target/broker if appropriate, the words of the agreement, and the cost presented for the stock of the target/broker.
Fairness evaluations don’t seem to be all the time required in transactions involving public companies, alternatively they may be able to be helpful in reducing the risk associated with number one financial actions or purchases, along with the risk of litigation. While they are not required, they may be able to also be a good way to facilitate verbal alternate between the various involved occasions.
Fairness evaluations are a in particular excellent concept if the transaction is pending as the result of a hostile takeover, if there are a few offers for the company at different prices, if company insiders are involved throughout the transaction, or if board contributors or shareholders have concerns regarding the fairness of the transaction.
Example of a Fairness Opinion
ABC Company has made an offer to shop for XYZ Corp. for $10 million. XYZ Corp.’s board of directors is to know whether or not or now not this is a fair offer from ABC Company. They have got no other offers on the table nowadays. XYZ Corp, as the target company in this scenario, hires an information at Impartial Investment Monetary establishment to conduct an analysis and weigh in on the fairness of this offer.
The information reviews 3 equivalent transactions. In line with highest practice, the three comps comprise companies within the equivalent industry with a an equivalent business model to XYZ Corp., and all transactions have taken place now not too way back, within the ultimate six months. The information calculates the EV-to-EBITDA a few for the three comps. In this system, EV is enterprise price and EBITDA is income previous to passion, taxes, depreciation, and amortization; a 12-month duration is used for EBITDA.
As a result of the analysis, the information informs XYZ Corp. that $10 million is an excellent price for this transaction. XYZ Corp.’s board of directors then approves the sale of the company for this amount. Additionally, a fairness opinion is sought after without end in international cross-border transactions provided via local market execs.
